Residence-based tax system commendable

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ZIMBABWE’S proposed residence based tax system which comes into effect in January 2014 will be simpler and more user friendly and is intended to widen the country’s tax base, a local taxation expert has said.

Report by Clive Mphambela

Presenting an analytical paper at the Zimbabwe Independent Dialogue series in Harare last week, Max Mangoro, a partner with Ernst & Young Advisory Services , said government had been motivated by several positive reasons to move to the residence based tax system.

One of the reasons, he said, was to place Zimbabwe’s income tax system on a sound footing which would protect the tax base from exploitation.

He also said the new measures were aimed at aligning the Zimbabwean tax system with international tax principles and best practices especially following the relaxation of exchange controls and the greater involvement of Zimbabwean companies offshore since dollarisation of the economy in 2009.

According to Mangoro, the proposed new Income Tax Act will effectively cater for the taxation of e-commerce transactions.
“To facilitate the implementation of the new proposals it has been necessary to re-define one of the most important building blocks on which the income tax system is based, namely what income is taxable?” Mangoro said.

“This is because income tax is levied on every person who has taxable income for the year of assessment.”

According to expert opinion, gross income definition in the new Act will be amended to reflect the world-wide basis of taxation.

“In short, all residents will be taxable on their Zimbabwean and foreign income, non-residents will be taxable on their Zimbabwean sourced income, whilst expatriates will be taxable on Zimbabwe sourced income and the income, if any, which accrues during that year from all sources outside Zimbabwe and which is required to be remitted to Zimbabwe in terms of exchange control regulations,”
Mangoro said.

He said currently, the Zimbabwean income tax system is primarily based on what is commonly referred to as the source plus basis of taxation under which all income which originates in Zimbabwe and certain types of income which are deemed to be from a source in Zimbabwe such as foreign dividends and foreign interest are taxable in terms of the Income Tax Act.

Because the new world-wide tax system is based on residency, it is crucial that there is certainty of what the term means.
Mangoro said two rules will apply to define what a resident is in respect of individual tax payers.

He said the first is a subjective test based on one’s ordinary place of abode under which a taxpayer is deemed to be a resident of Zimbabwe if his or her permanent home, to which he or she will return , is in Zimbabwe and he or she is present in Zimbabwe at any time during the year of assessment.

“The second rule, based on physical presence in Zimbabwe is time-based and more objective. A person will become a resident if he or she is present in Zimbabwe for one or more periods amounting in aggregate to at least one hundred and eighty-three days in any twelve-month period that ends during the year of assessment,” he said.

Mangoro said for corporate taxes, a company will be a resident if it is incorporated, effectively managed and controlled or undertakes the majority of its operations in Zimbabwe during the year of assessment.

Control in this sense means where Zimbabwean residents hold more than 50% of the participation rights or votes in the entity or control the entity.

 

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